Wednesday, 29 June 2011

Voting for the Greek mid-term fiscal plan

The Parliamentary vote for the Greek mid-term fiscal plan occurs this evening. At stake are two key national policies: those of privatisation targets (and the use of funds) of up to EUR 50 bln by 2015, as well as a further EUR 28 bln (estimated) in austerity savings and tax increases over the same time frame.

Passing this vote is a key condition for the release of the EUR 12 bln fifth instalment of the original EUR 110 bail-out plan.

Unfortunately, the situation in Greece as well as internationally has now changed to the extent where it is impossible to speak of a rational debt restructuring process. It would appear that in its place, we have passed into the real of destructive politics, institutional rivalry, and unacceptable profit-making at the expense of Greece.

• The IMF and the Eurozone have now changed directions twice: in the week of 13 June, prior to the vote of confidence in the new Papandreou cabinet, it was indicating that the fifth instalment would be released. As soon as the Papandreou government won the vote of confidence, they reverted to the original strict conditionality, replete with dire warning of economic catastrophe.

• President Sarkozy of France is reported to have arranged a 30 year bond roll-over, in which 50% of the value will be lent at an annual rate of 5.5%, with a potential upside in the case of higher GDP growth. Of the remaining 50%, 20% will be cashed out (apparently by the bail-out package), while the other 30% will be invested in long-term, low interest bonds backed by an EFSF guarantee. While this is an good deal in principle (many details remain to be worked out), the fact is that the French government is negotiating directly with French creditors of Greece, apparently without any role for Greece in the negotiations. This goes against any principle of sovereign or private sector debt restructuring, and is a good indication of the lack of respect for basic principles with which the Greek debt issue is being handled.

• Passing the mid-term plan will undoubtedly increase the short term decline in GDP. In my original forecast, I was counting on a 4% decline in 2011 and a 2% decline in 2012: I believe the 2012 decline will increase to -4%. The austerity plan targets “easy” revenue increases and tax cuts, for instance by raising the price of heating oil to parity with that of gasoline. This measure alone will add between EUR 800 – 1,500 per year to the heating bill, which many lower- and middle-class families simply cannot afford. In contrast, there are insufficient measures to crack down on tax evasion within Greece and in terms of Greek accounts held abroad.

There is, however, one extremely positive aspect of the plan: it establishes that privatisation revenue can (and will) be used to purchase Greek debt. If this can be done on the open market, it will be a key element in any eventual debt work-out.

The key problems affecting the resolution of the Greek debt situation are unfortunately not resolved at the European level:

• Apart from the real interest rate loss implied in the French proposal, there is no systematic approach to managing the problem of the interest rate on Greek debt. Without such a measure, it is difficult to see how how the country can manage its total debt holdings. In most debt restructurings, the first thing to be addressed is the issue of interest rates. The fact that this has not been done by the IMF and Eurozone in the case of Greece is incomprehensible, if not criminal.
• Besides the interest rate issue, there has been no systematic attempt to deal with the second major problem, which is debt maturity. Greek sovereign debt had an average maturity of 7 years in 2010. This means that between 2011-2017, 100% of Greece’s EUR 340 bln debt expires and must be refinanced. It was impossible to conceive how this could be done in May 2010, when the original bail-out package was negotiated: it is equally impossible to see how this can be done today, in June 2011.

• Greece is still not negotiating as an equal partner. The fact that the new Minister of Finance, Evangelos Venizelos, was excluded from the discussion of the communiqué of the last Eurofin meeting is unacceptable. Greece, at the initiative of George Papandreou, has sacrificed any negotiating position vis-à-vis its creditors. As a result, European leaders have stepped in, transforming what should be a simple process into a political free-for-all. Their ability to manage the debt restructuring is a total shambles, to put it lightly.

• The IMF was invited into the Greek debt restructuring deal based on its vaunted ability to manage a sovereign debt restructuring. Yet its initial model was flawed. The IMF then forced the Eurozone to address the issue of Greek debt refinancing in 2012-2013, since it was obvious that Greece would not be returning to the markets any time soon. This has sparked the “negotiation” of a second bail-out, yet this second bail-out does not address the first two key issues mentioned: that of an interest rate freeze and an extension of Greek debt maturities.

No one can claim to have performed well in this crisis, and unfortunately it is far from being over. Absent an agreement to freeze interest rates, the revenues from the mid-term fiscal plan will be overwhelmed by the costs of interest to 2015. In this time, Greece will have to spend over EUR 75 bln on interest, which it should not have to do under a normal debt restructuring plan.

I believe the plan will be voted through tonight, at tremendous political cost. Yet even if the plan fails, it will be no more than both the Greek government, its Eurozone and IMF partners, and the banking sector deserve. It is difficult to think of a greater failure in terms of international policy than the handling to date of the Greek debt crisis.

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